Posted on 08 Sep 2011
In suing 131 individuals in its effort to recover losses on $200 billion of mortgage debt that went sour, the federal agency overseeing mortgage giants Fannie Mae and Freddie Mac is doing one thing that the U.S. government has largely left alone: It's trying to hold actual people, not just companies, responsible for their roles in the global financial crisis.
The 18 lawsuits by the Federal Housing Finance Agency, including 17 filed last week and one in July, signal a change from prior federal efforts to punish banks and bankers for their roles in the financial crisis.
That difference may stem in part from the FHFA's belief that it has enough evidence to pursue civil claims against banking executives.
Its lawsuits draw on information generated by 64 subpoenas issued last year for details on pools of mortgage securities that Fannie Mae and Freddie Mac bought. They also draw on probes by a U.S. Senate investigation subcommittee and the Financial Crisis Inquiry Commission, among other sources.
Most of the higher-profile financial crisis cases brought by the Department of Justice, such as its civil fraud against Deutsche Bank AG, or the Securities and Exchange Commission have named few or no individual defendants. So far, no top executives at major banks have been criminally charged.
"Each agency has its own statutory authority, and its own particular evidence," said Peter Swire, a law professor at Ohio State University and former special assistant to the president for economic policy in the Obama administration.
"The FHFA is not part of the executive branch," Swire added. "It does not report to the president. If the FHFA finds the right evidence, it decides on its own to move forward."
Sixteen of the FHFA lawsuits name two or more individuals as defendants, each of whom is said to have signed at least one regulatory filing that allowed the sale of the problem debt. Two people were sued in three different lawsuits.
The lawsuit against JPMorgan Chase & Co names 38 individual defendants, including over alleged wrongdoing at Bear Stearns Cos and Washington Mutual Inc, which the bank bought. Three lawsuits targeting Bank of America Corp name 27 individual defendants.
FORECLOSURE SETTLEMENT PENDING
None of the individual defendants is a household name, though some hold high positions in finance. Former Countrywide Financial Corp president Stanford Kurland, for example, is now chief executive of PennyMac Mortgage Investment Trust. He is also a defendant in many other Countrywide lawsuits.
In one case, the FHFA said former Bear Stearns mortgage executive and defendant Jeffrey Verschleiser "forcefully advocated" packaging loans into securities before homeowners started missing payments, triggering default provisions.
And, in its lawsuit against Goldman Sachs Group Inc, the FHFA said Kevin Gasvoda, then head of residential whole loan trading, in February 2007 directed sales staff to sell mortgage debt as part of Goldman's push to offload "declining and defective" mortgage assets.
"Great job syndicate and sales, appreciate the focus," he replied after substantial sales took place, the lawsuit said.
A JPMorgan spokesman declined to comment on its lawsuit and Verschleiser. A Goldman spokesman declined to comment on its lawsuit, and said Gasvoda remains employed at the bank. Verschleiser now heads mortgage operations at Goldman.
The FHFA's mandate is to oversee secondary mortgage markets, help make Fannie Mae and Freddie Mac sound and solvent, and minimize taxpayer losses.
Its lawsuits mark a new tack by the government, at a time investors generally are worried about the ability of banks worldwide to weather soft economies, tight credit conditions, and excess debt, including at the sovereign level.
Federal regulators are also working with all 50 state attorneys general on a possible $20 billion settlement with big banks to address "robo-signing" and other foreclosure abuses.
"There are many doubts about the legitimacy of the banks' activities," said Raymond Brescia, visiting clinical associate professor at Yale Law School. "Resolution of these lawsuits could clear up many of these doubts."
The Justice Department's biggest lawsuit this year related to the credit and financial crises is a civil case, accusing Deutsche Bank of hoodwinking a federal housing agency into insuring poor quality mortgages. The case names no individual defendants, and Deutsche Bank has sought to dismiss it.
Federal prosecutors have also pursued only two significant criminal cases tied to the crisis through trial, with mixed results.
In the first, former Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin were acquitted of fraud in November 2009. In the second, former Taylor, Bean & Whitaker Mortgage Corp Chairman Lee Farkas was convicted in April, and later sentenced to 30 years in prison.
Meanwhile, the SEC has targeted individuals in only a handful of major cases.
Last year, it named just one individual defendant in its lawsuit against Goldman over a soured mortgage investment, Abacus. Goldman settled for $550 million. The individual, vice president Fabrice Tourre, is still fighting the SEC charges.
Earlier, the SEC got a $150 million settlement from Bank of America over its failure to disclose details about its takeover of Merrill Lynch, and a $67.5 million accord with former Countrywide Chief Executive Angelo Mozilo.
But the federal judge who approved the Bank of America accord called it "half-baked justice at best," saying it was not directed at people responsible for the nondisclosures.
Mozilo admitted no wrongdoing, and insurance covered much of his payout. Experts said insurance could also limit liability for some individuals in the FHFA cases.
The FHFA's decision to go after individual defendants may reflect more potentially incriminating facts uncovered through its subpoenas than what other agencies found in their probes.
Also, the FHFA faces a lower standard of proof in civil cases than the Justice Department faces in criminal cases: that wrongdoing was more likely than not to have occurred, not that it occurred beyond a reasonable doubt.
Moreover, because the FHFA did not exist until the summer of 2008, six weeks before Fannie Mae and Freddie Mac were taken over by the government, it had no real chance to work with bank executives to address alleged improper practices.
Lawsuits against the banks and some of those executives are part of the clean-up effort.
"After the savings and loan collapse, a lot of individuals were targeted by the government, including by the Resolution Trust Corp," said Alan White, a law professor at Valparaiso University and expert on predatory lending and foreclosures. "The FHFA fills sort of the same role."